What is the optimal cash discount percent for the firm

Assignment Help Financial Management

Reference no: EM131517083

Firm A is trying to decide whether to offer a 3.0% cash discount for payments made within 10 days, making its new terms 3/10, net 30. On average, its paying customers currently pay in 40 days under its present terms of net 30. A sales analyst estimates that sales will stay the same. The existing bad-debt loss rate is 3%; the rate under the new policy will be the same. It is estimated that 40% of the paying customers will take the discount and pay on the 10th day, on average. The remaining paying customers will continue to pay in 40 days, on average. The company’s annual cost of capital is 10%. Annual sales will remain unchanged at $250 million, and the variable cost ratio will continue to be 60%. The variable expenses for credit administration and collections will drop from 5% to 4% if the cash discount is implemented.

1. What is the 1-day change in value related to the proposed terms?

2. What is the change in daily net present value related to the proposed terms?

3. Do you recommend that the firm initiate the discount?

4. What is the optimal cash discount percent for the firm?

Reference no: EM131517083

Questions Cloud

They are charged maximum interest rate for that year : what will their payments be at the beginning of the 6th year assuming they are charged maximum interest rate for that year?

What is the total interest of the loan : What is the total interest of the loan?

Compute price of the bonds based on semiannual analysis : Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, Compute the price of the bonds based on semiannual analysis.

What is the difference in net present values : What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment?

What is the optimal cash discount percent for the firm : What is the 1-day change in value related to the proposed terms? What is the optimal cash discount percent for the firm?

The stock current price should : The stock's required return is 14%. The stock's current price (Price at year 0) should be $____________.

What is lower bound of an european foreign currency call : What is the lower bound of an European foreign currency call if the spot rate is 2.25 the domestic interest rate is 5.5%

The estimated price per share of the stock six years : The estimated price per share of the stock six years from now should be $_________.

The stocks estimated price per share exactly two years : The stock's estimated price per share exactly TWO years from now, P2 , should be $______.

User Account

All Pages